The abandonment of agricultural collectivization and the end of totalitarianism brought with them new problems, which grew worse the longer the communist party enjoyed a monopoly of power. These included increasing corruption and nepotism (a traditional feature of Lao political life), as ideological commitment faded and self-interest arose to replace it as the major motivation for seeking and holding office. The economic benefits of economic liberalisation were also slow to emerge.

Unlike China, Laos did not have the potential for rapid economic growth through free market mechanisms in agriculture and the fostering of export-driven low-wage manufacturing. This was partly because Laos was a small, poor, landlocked country while China had the advantage of decades more communist development. As a result, the Lao farmers, most living at little more than subsistence level, could not generate the surpluses, even given economic incentives, that the Chinese peasants could and did after Deng's decollectivisation of agriculture.

Cut off from educational opportunities in the west, many young Lao were dispatched for higher education in Vietnam, the Soviet Union or eastern Europe, but even crash education courses took time to produce trained teachers, engineers and doctors. In any case, the standard of training in some cases was not high, and many of the Lao students lacked the language skills to understand what they were being taught. Today many of these Lao regard themselves as a "lost generation" and have had to gain new qualifications at western standards to be able to find employment.

By the mid-1980s relations with China had begun to thaw as Chinese anger at Lao support for Vietnam in 1979 faded and Vietnamese power within Laos diminished. With the collapse of communism in eastern Europe, which began in 1989 and ended with the fall of the Soviet Union in 1991, came a profound shock to the Lao communist leaders. Ideologically, it did not suggest to the Lao leaders that there was anything fundamentally wrong with socialism as an idea, but it confirmed for them the wisdom of the concessions in economic policy they had made since 1979. Aid was cut off completely in 1990, creating a renewed economic crisis. Laos was forced to ask France and Japan for emergency assistance, and also to ask the World Bank and the Asian Development Bank for aid. Finally, in 1989, Kaisôn visited Beijing to confirm the restoration of friendly relations, and to secure Chinese aid. In the 1990s the old guard of Lao communism passed from the scene.

Since the 1990s the dominant factor in the Lao economy has been the spectacular growth in the South-East Asian region, and particularly in Thailand. To take advantage of this, the Lao government lifted virtually all restrictions on foreign trade and investment, allowing Thai and other foreign firms to set up and trade freely in the country. Lao and Chinese exiles were also encouraged to return to Laos, and to bring their money with them. Many did so - today a member of the former Lao royal family, Princess Manilai, owns a hotel and health resort in Luang Phrabāng, while some of the old Lao elite families, such as the Inthavongs, again operate (if not live) in the country.

Since the reforms of the 1980s, Laos has achieved sustained growth, averaging six percent a year since 1988, except during the Asian financial crisis of 1997. But subsistence agriculture still accounts for half of GDP and provides 80 percent of total employment. Much of the private sector is controlled by Thai and Chinese companies, and indeed Laos has to some extent become an economic and cultural colony of Thailand, a source of some resentment among Lao. Laos is still heavily dependent on foreign aid, but Thailand's ongoing expansion has increased demand for timber and hydroelectricity, Laos's only major export commodities. Recently Laos has normalised its trade relations with the US, but this has yet to produce any major benefits. The European Union has provided funds to enable Laos to meet membership requirements for the World Trade Organization. A major hurdle is the Lao kip, which is still not an officially convertible currency.

The communist party retains a monopoly of political power, but leaves the operation of the economy to market forces, and does not interfere in the daily lives of the Lao people provided they do not challenge its rule. Attempts to police the religious, cultural, economic and sexual activities of the people have been largely abandoned, although Christian evangelism is officially discouraged. The media is state controlled, but most Lao have free access to Thai radio and television (Thai and Lao are mutually comprehensible languages), which gives them news from the outside world. Modestly censored Internet access is available in most towns. Lao are also fairly free to travel to Thailand, and indeed illegal Lao immigration to Thailand is a problem for the Thai government. Those who challenge the communist regime, however, receive harsh treatment. For the time being most Lao seem content with the personal freedom and modest prosperity they have enjoyed over the past decade.